China Needs Higher Inflation
Some Chinese economists have attempted to assuage inflation fears by noting that the recent surge in the producer price index is unlikely to translate into a sharp uptick in consumer prices. In fact, this is precisely what China should fear.
BEIJING – Recent price increases in the world’s two largest economies have unnerved global markets, which have become accustomed to the low inflation – and even deflation – that has prevailed for decades. But, at least in China, a little inflation would not be a bad thing.
In the United States, massive government spending during the COVID-19 crisis has raised fears of a financial reckoning, and recent price data are reinforcing these concerns. The consumer price index (CPI) surged by 4.2% year on year in April – the fastest growth since 2008. Moreover, the monthly increase accelerated to 0.8% in April, from 0.6% in March, although the rate fell back to 0.6% in May. The producer price index (PPI) has also risen, to 217.5 in April, up from 185.5 a year earlier.
These data have intensified pressure on the US Federal Reserve to tighten its ultra-loose monetary policy. And yet, in April, Fed Chair Jerome Powell stressed that the central bank is still a “long way” from withdrawing monetary support, even if that means allowing inflation to run above 2% temporarily. This should calm markets, though many economists remain convinced that the Fed is overestimating its ability to keep inflation under control in the longer term.